After tornadoes and violent storms caused $32 billion in losses in 2011 and another $2 billion last month, a new report contends homeowners insurance rates are likely to rise in coming months.
CoreLogic of Santa Ana, Calif., looked at the risk associated with changing tornado and hail patterns outside of Tornado Alley, the narrow corridor in the Midwest where twisters typically touch down.
“The apparent increase in the number of incidents and shift in geographic distribution of losses that occurred last year called the long-held notion of risk concentration in Tornado Alley into question and is leading to changes in risk management policy and procedure,” said Howard Botts, vice president and director of database development for CoreLogic Spatial Solutions.
While CoreLogic suggests that many insurers will ask state regulators for rate increases this year, Randy Ramlo, president and CEO of United Fire & Casualty Co. in Cedar Rapids, disagrees with that forecast.
“We look at historic weather patterns a lot, but unfortunately with hail, tornadoes and hurricanes, one year certainly doesn’t constitute a trend,” Ramlo said. “We looked at historic tornado trends, and obviously 2011 was a pretty big year, but it actually wasn’t that much different from 2010.”
What is striking about 2011 is the storms’ locations.
“The difference was that tornadoes hit populated areas like Joplin, Mo., and Tuscaloosa and Birmingham, Ala.,” Ramlo said. “This year, we started off again with a pretty run-of-the-mill tornado, but it hit Branson, Mo., which is another big populated area.”
Iowa is not considered part of Tornado Alley, but data from the National Oceanic and Atmospheric Administration ranks the state third-highest for tornado touchdowns per 100 square miles and hail damage. Ramlo said the state is fortunate in one respect — tornadoes tend to strike unpopulated areas in the western half of the state.
“That tends to sharply reduce the damage claims,” he said. “We are not seeing a long-term increase in tornado activity, and we’re really not seeing a shift in where they are occurring.”
If tornadoes would increase in Iowa, he said, the company would consider its losses and perhaps go to the state insurance commissioner with a request for a rate increase.
Iowa Insurance Commissioner Susan Voss said insurers must support any rate increase request with claims data for losses incurred in Iowa.
“When insurers file for a rate increase, we don’t allow them to take losses incurred outside of Iowa and push them onto Iowa policyholders,” Voss said. “If someone has a policy with State Farm and the company has incurred a lot of losses in Alabama or Mississippi, they should not assume that they will be paying for those losses. We look at that very closely.”
While Ramlo does not expect to see insurers filing rate requests this year in Iowa, an insurance industry analyst disagrees.
“We have not had an enormous number of hurricanes recently, but there have been very significant interior losses that have been occurring since 2008,” such as tornadoes, thunderstorms, large hailstorms, straight-line wind and wildfires, said Robert Hartwig, president of the Washington-based Insurance Information Institute.
Hartwig said if storms continue to inflict catastrophic damage, insurers are likely to file for rate increases to offset the losses.
A.M. Best Co. Inc., which looks at the financial resources of insurers to withstand catastrophic losses, said in a March 12 briefing that property and casualty insurers are “adequately positioned to handle a ‘normalized’ weather year.”
A.M. Best will revise its assessment, however, if there is a “continuation of frequent and severe weather events in 2012, which are beyond expectations.”
Comparing the property and casualty insurance industry’s results for 2011 against 2010, homeowners insurance premiums increased 3.5 percent, said Meyer Shields, a financial analyst for Stifel Nicolaus in St. Louis. Shields said the increase indicates to him that “rate increases stemming from recent years’ unexpectedly high weather-related losses are gaining traction.”
Why home insurance rates increase
- More severe weather in recent years.
- Higher costs for rebuilding.
- Lower return on insurers’ investments.
- Rising premiums for reinsurance coverage.
- Limits imposed by some states on insurers to charge premiums that reflect risk.